Tax Overextenders

Tax extenders – those oddities of the US tax code that are technically temporary but which Congress renews year after year – are the subject of the latest drama on Capitol Hill. “No one thinks it’s a good policy,” Suzy Khimm explains, but these days, such a consensus is no obstacle to gridlock, and an effort to make the tax code a little less derpy looks like it will fall by the wayside:

Taxes ExpirationGOP Ways and Means Chair Dave Camp and Senate Majority Leader Harry Reid had been putting together a bill that would significantly expand the research and development tax break and make it permanent, along with tax breaks for commuting expenses, teacher expenses on school supplies, and a write-off for state and local taxes. The cost of the proposal, which would not be offset, topped $400 million. The emerging bipartisan proposal would have extended most of the temporary tax breaks for the next two years.

Instead, the House is now expected to vote on a bill that will simply continue most of the tax breaks for yet another year, after President Obama indicated last week that he was prepared to veto the emerging Reid-Camp deal. Along with Senate liberals, the administration objected to the plan for providing permanent tax relief to corporations while failing to provide relief to lower-income Americans as well. Expansions to both the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) are scheduled to expire in 2017, and Republicans left the provisions — which largely benefit lower-income, working Americans — out of their plan.

The reason given for this move by the GOP?  Republicans feared that the benefits of the expanded CTC and EITC would accrue to undocumented immigrants covered by Obama’s recent executive order:

For years, the GOP has railed against undocumented immigrants who claim the child tax credit, and Obama’s immigration order raised the prospect they would begin claiming the EITC, as well. If Republicans agreed to extend them now, it would look like they were voting to expand government benefits to illegal immigrants. What’s more, the EITC is notorious among Republicans for fraud. It has one of the highest rates of improper payments of any federal program. How would they sell that to rank-and-file Republicans in the House?

Chait doesn’t buy that explanation, though. The way he sees it, Republicans simply don’t want to cut taxes on the poor:

The idea that tax breaks for low-income workers amounts to a form of welfare is itself a somewhat contested premise within the Republican party. Large elements of the conservative party have spent the Obama years simmering with rage at the insufficiently high tax rates paid by low-income workers. Mitt Romney’s candid rant against the 47% percent who (allegedly) pay no taxes merely recycled a right-wing meme. Since Romney’s defeat, some Republicans have gently urged their party to ease up of their campaign to force low-income workers to pay more taxes. But adding the cultural-legal panic to the preexisting class-war panic was apparently enough to turn the GOP’s grudging acceptance of the low-income tax breaks into full-scale opposition.

So first Republicans made the tax breaks for business permanent, while allowing the tax breaks for low-income workers to expire at the end of 2017. Since they would no longer be tied to tax breaks for the more affluent constituencies that have influence with Republicans, this would mean they would almost certainly expire. Families earning $10,000 to around $25,000 a year would lose nearly $2,500 a year — a punishing blow to the working class[.]

Michael Tanner argues that Obama was right to threaten a veto of the Reid-Camp deal, most of which he calls “a grab bag of special-interest giveaways”:

Even the few provisions designed to help ordinary taxpayers are likely to have unintended consequences. For example, state income taxes have long been deductible from federal taxes, but this legislation would allow taxpayers to choose to deduct state and local sales taxes instead, meaning that people in states with no income tax would now benefit from the deduction as well.  But such tax breaks simply encourage states to raise their taxes. They are, in effect, a reward for high-tax states. Economists estimate that state taxes are 13 to 14 percent higher than they would be in the absence of federal deductibility.

Similarly, the American Opportunity Tax Credit, which allows parents or children to claim a tax credit for tuition and other education expenses during the first four years of college, is primarily passed through to higher tuitions. As a result, the credit may actually make it more difficult for non-qualifying families to afford college.

Danny Vinik urges the Dems to accept a short-term deal:

The Reid-Camp deal was flawed for a number of reasons: It was bad for the environment, bad for the deficit, bad for low-income Americans and very good for big business. But two reasons stand out above the others. First, it would have permanently lowered the long-term revenue baseline. By making certain tax breaks permanentlike the credit for R&Dwithout including a corresponding revenue offset, the deal would have lowered federal revenues in the future. Any revenue-neutral tax reform would leave less money for Democrats to spend on policies like universal pre-k. A short-term extension, on the other hand, would have little effect on future revenues, keeping the revenue baseline at its current level.

Howard Gleckman reviews why tax extenders are a bad way to make tax policy:

Real time-limited tax breaks are not necessarily bad. Congress may want to address a short-term problem, such as the recent recession, with a transitory tax cut. And, in theory, a short leash gives lawmakers an opportunity to review the subsidy each year. If it proves unnecessary or inefficient, it can be revised or dropped. In theory. But not in practice. Once one of these tax subsidies becomes law, it joins a tangled web of purportedly temporary tax cuts. They often have nothing in common besides their artificial temporariness and a tacit agreement among lobbyists and lawmakers that they will all be extended together. Thus, they become immortal.

(Chart from CBPP.)